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Property Management Companies and Security Deposits

Security DepositIn recent months, I have handled an increasing number of risk management inquiries for real estate agents and brokers who are property managers for property owners who rent out residential properties.

The most common disagreement between landlords and tenants for years has been over the refund of the tenant’s security deposit after the tenant has vacated the residential rental. California Civil Code section 1950.5 sets forth detailed procedures that the landlord must follow for the refund, use, and accounting for a tenant’s security deposit. Civil Code section 1950.5 is written in terms of the landlord’s, as opposed to the property manager’s, duties concerning this security deposit.

California Civil Code section 1950.5 allows the landlord to use a tenant’s security deposit for: (1) unpaid rent; (2) cleaning the rental unit when the tenant moves out, but only to make the unit as clean as it was when the tenant first moved in; (3) repair of damages other than normal wear and tear caused by the tenant or the tenant’s guests; (4) If the written  lease or rental agreement specifically allows for the cost of restoring or replacing furniture, furnishings, or other items of personal property (including keys), other than because of normal wear and tear.

A landlord can withhold from the security deposit amounts that is reasonably necessary for the above four purposes. The security deposit cannot be used for repairing defects that existed in the rental before move in, for conditions caused by normal wear and tear during the tenancy or previous tenancies, or for cleaning a rental unit that is as clean as it was at move in. A rental agreement or lease can never state that a security deposit is “nonrefundable.” In California there is no such thing as a non-refundable security deposit.

security depositWithin 21 calendar days or less after move out, the landlord must either send the former tenant a full refund of the security deposit stated in the written rental agreement or lease, or mail or personally deliver to the former tenant an itemized statement.  That itemized statement must  list the amounts of any deductions from the security deposit and the reasons for the deductions, with a refund of any amounts not deducted in addition to back up documentation such as estimates, receipts, cancelled checks and the like evidencing the reasons for the debits. (Civil Code section 1950.5).

From a practical aspect, since Civil Code section 1950.5 is written in terms of the landlord’s duties to his or her tenant and any security deposit, it is suggested that all property managers do not hold any tenant’s security deposit for a prolonged period. If a tenant provides a property manager a security deposit made out to the property manager’s client trust account as opposed to the property owner landlord, it is suggested that the property manager do the following: (1) deposit as soon as possible any security deposit made out to the property manager’s client trust account in the account; (2) assuming the security deposit is a check, when the check is deemed good by the property manager’s bank, issue a  check payable to the property owner landlord for the amount of the security deposit and send it immediately to the landlord with a cover letter stating that the check is the tenant’s security deposit with a copy of the letter and check to the tenant; (3) save a copy of the second check and transmission letter in the transaction file (hard copy and electronically).

If the security deposit is issued in the name of the property owner landlord, make a copy of the check for the transaction file.  Send a cover letter to the landlord, referencing that the specific check is the tenant’s security deposit, with a copy of the letter and check to the tenant. Save a copy of the check and transmission letter in the transaction file (hard copy and electronically).

In the real estate arena and in particular property management, having a detailed paper trail of any transaction —  particularly a monetary transaction — in one’s file will prevent needless headaches and anxiety for a real estate licensee.

Since Civil Code section 1950.5 is worded in terms of a landlord’s duties to his or her tenant with respect to security deposits, and assuming the landlord holds the tenant’s security deposit at the end of the lease and upon move out, a property manager is removed from a dispute over the refund of a tenant’s security deposit after move out if the property manager does not hold a tenant’s security deposit at the end of the lease.

I have defended several Civil Code section 1950.5 claims against the property management company and individual licensee against a tenant, where the property management company unfortunately held the tenant’s security deposit in its client trust account where a dispute arose between the landlord and tenant over claimed damage repair.  The landlord instructed the property manager to refund a lesser amount from the property management company’s client trust account than what the former tenant thought was owed.

The result was a lawsuit and cross-complaints by the landlord against the property management company and property manager and vice versa. where the property management company’s loss runs for insurance purposes was negatively impacted. Had the landlord held the former tenant’s security deposits as opposed to the property management company, my clients most likely would not have been named in any of these lawsuits where the landlord-tenant statutes in California clearly favor the tenant over the landlord.

Edward McCutchan, JrGuest blog written by Edward McCutchan, Jr.
Partner, Sunderland | McCutchan, LLP

Edward McCutchan, Jr. was admitted to the California State Bar in December 1985 and is qualified to practice law in all California, the United States District Court (Eastern and Northern Districts of California) as well as the United States Tax court.

Mr. McCutchan’s practice is primarily civil litigation with an emphasis in defending professionals and businesses in real estate, mortgage brokering, construction, banking and agricultural industries and all phases of dispute resolution through trial and appeal. His area of practice is also agricultural law (viticulture and wineries), trusts and estates, probate, real estate transactions, business law and elder abuse.

Edward McCutchan graduated from the University of California at Davis with a Bachelor of Arts degree in 1982, graduated from Golden Gate University in San Francisco, California with a Juris Doctris degree in 1985 and graduated from McGeorge School of Law with an LL.M, in Business and Taxation in 1986. He is a member of the California State Bar and the Sonoma County Bar Association.

Mr. McCutchan has been a partner with Sunderland | McCutchan, LLP since 2005 and was previously a partner with Ginder, Sunderland & Carlson, LLP from 2003 through 2005. He is a former Deputy District Attorney with the Sonoma County District Attorney’s Office and has personally tried many jury and court trials in addition to administrative hearings and binding arbitrations.

Edward McCutchan is an experienced mediator and arbitrator handling private matters as well as California State Bar disputes with the State Bar’s fee dispute program between attorney’s and their clients. He has served as a court appointed Judge Pro Tem, Arbitrator and Settlement Commissioner in Alameda and Sonoma Counties. He has served as an expert witness in attorney standard of care matters, real estate broker/agent standard of care issues as well as agricultural matters in the viticulture field. Edward McCutchan manages the firm’s Santa Rosa, California office.

Edward McCutchan, Jr  |

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